Results for “solve for equilibrium” 219 found
Manufacturing and Trade
It has become popular in some circles to argue that trade—or, in the more “sophisticated” version, that the dollar’s reserve-currency status—undermines U.S. manufacturing. In reality, there is little support for this claim.
Let’s begin with some simple but often overlooked points.
- The US is a manufacturing powerhouse. We produce $2.5 trillion of value-added in manufacturing output, more than ever before in history.
- As a share of total employment, employment in manufacturing is on a long-term, slow, secular trend down. This is true not just in the United States but in most of the world and is primarily a reflection of automation allowing us to produce more with less. Even China has topped out on manufacturing employment.
- A substantial majority of US imports are for intermediate goods like capital goods, industrial supplies and raw materials that are used to produce other goods including manufacturing exports! Tariffs, therefore, often make it more costly to manufacture domestically.
- The US is a big country and we consume a lot of our own manufacturing output. We do export and import substantial amounts, but trade is not first order when it comes to manufacturing. Regardless of your tariff theories, to increase manufacturing output we need to increase US manufacturing productivity by improving infrastructure, reducing the cost of energy, improving education, reducing regulation and speeding permitting. You can’t build in America if you can’t build power plants, roads and seaports.
- The US is the highest income large country in the world. It’s hard to see how we have been ripped off by trade. China is much poorer than the United States.
- China produces more manufacturing output than the United States, most of which it consumes domestically. China has more than 4 times the population of the United States. Of course, they produce more! India will produce more than the United States in the future as well. Get used to it. You know what they say about people with big shoes? They have big feet. Countries with big populations. They produce a lot. More Americans would solve this “problem.”
- Most economists agree that there are some special cases for subsidizing and protecting a domestic industry, e.g. military production, vaccines.
The seven points cover most of the ground but more recently there has been an argument that the US dollar’s status as a reserve currency, which we used to call the “exorbitant privilege,” is now somehow a nefarious burden. This strikes me as largely an ex-post rationalization for misguided policies, but let’s examine the core claim: the US’s status as a reserve currency forces the US dollar to appreciate which makes our exports less competitive on world markets. Tariffs are supposed to (somehow?) depreciate the currency solving this problem. Every step is questionable. Note, for example, that tariffs tend to appreciate the dollar since the supply of dollars declines. Note also that if even if tariffs depreciated the currency, depreciating the currency doesn’t help to increase exports if you have cut imports (see Three Simple Principles of Trade Policy). I want to focus, however, on the first point does the US status as world reserve currency appreciate the dollar and hurt exports? This is mostly standard economics so its not entirely wrong but I think it misses key points even for most economists.
Countries hold dollars to facilitate world trade, and this benefits the United States. By “selling” dollars—which we can produce at minimal cost (albeit it does help that we spend on the military to keep the sea lanes open)—we acquire real goods and services in exchange, realizing an “exorbitant privilege.” Does that privilege impose a hidden cost on our manufacturing sector? Not really.
In the short run, increased global demand for dollars can push up the exchange rate, making exports more expensive. Yet this effect arises whatever the cause of the increased demand for dollars. If foreigners want to buy more US tractors this appreciates the dollar and makes it more expensive for foreigners to buy US computers. Is our tractor industry a nefarious burden on our computer industry? I don’t think so but more importantly, this is a short-run effect. Exchange rates adjust first, but other prices follow, with purchasing power parity (PPP) tendencies limiting any long-term overvaluation.
To see why, imagine a global single-currency world (e.g., a gold standard or a stablecoin pegged to the US dollar). In this scenario, increased demand for US assets would primarily lead to lower US interest rates or higher US asset prices, equilibrating the market without altering the relative price of US goods through the exchange rate mechanism. With freely floating exchange rates, the exchange rate moves first and the effect of the increased demand is moderated and spread widely but as other prices adjust the long-run equilibrium is the same as in a world with one currency. There’s no permanent “extra” appreciation that would systematically erode manufacturing competitiveness. Notice also that the moderating effect of floating exchange rates works in both directions so when there is deprecation the initial effect is spread more widely giving industries time to adjust as we move to the final equilibrium.
None of this to deny that some industries may feel short-run pressure from currency swings but these pressures are not different from all of the ordinary ups and down of market demand and supply, some of which, as I hove noted, floating exchange rates tend to moderate.
Ensuring a robust manufacturing sector depends on sound domestic policies, innovation, and workforce development, rather than trying to devalue the currency or curtail trade. Far from being a nefarious cost, the U.S. role as issuer of the world’s reserve currency confers significant financial and economic advantages that, in the long run, do not meaningfully erode the nation’s manufacturing base.
Was our universe born inside a black hole?
Without a doubt, since its launch, the James Webb Space Telescope (JWST) has revolutionized our view of the early universe, but its new findings could put astronomers in a spin. In fact, it could tell us something profound about the birth of the universe by possibly hinting that everything we see around us is sealed within a black hole.
The $10 billion telescope, which began observing the cosmos in the Summer of 2022, has found that the vast majority of deep space and, thus the early galaxies it has so far observed, are rotating in the same direction. While around two-thirds of galaxies spin clockwise, the other third rotates counter-clockwise.
In a random universe, scientists would expect to find 50% of galaxies rotating one way, while the other 50% rotate the other way. This new research suggests there is a preferred direction for galactic rotation…
“It is still not clear what causes this to happen, but there are two primary possible explanations,” team leader Lior Shamir, associate professor of computer science at the Carl R. Ice College of Engineering, said in a statement. “One explanation is that the universe was born rotating. That explanation agrees with theories such as black hole cosmology, which postulates that the entire universe is the interior of a black hole.
“But if the universe was indeed born rotating, it means that the existing theories about the cosmos are incomplete.”
…This has another implication; each and every black hole in our universe could be the doorway to another “baby universe.” These universes would be unobservable to us because they are also behind an event horizon, a one-way light-trapping point of no return from which light cannot escape, meaning information can never travel from the interior of a black hole to an external observer.
Here is the full story. Solve for the Darwinian equilibrium! Of course Julian Gough has been pushing related ideas for some while now…
The political economy of Manus AI
Early reports are pretty consistent, and they indicate that Manus agentic AI is for real, and ahead of its American counterparts. I also hear it is still glitchy Still, it is easy to imagine Chinese agentic AI “getting there” before the American product does. If so, what does that world look like?
The cruder way of putting the question is: “are we going to let Chinese agentic bots crawl all over American computers?”
The next step question is: “do we in fact have a plausible way to stop this from happening?”
Many Chinese use VPNs to get around their own Great Firewall and access OpenAI products. China could toughen its firewall and shut down VPNs, but that is very costly for them. America doesn’t have a Great Firewall at all, and the First Amendment would seem to prevent very tough restrictions on accessing the outside world. Plus there can always be a version of the new models not directly connected to China.
We did (sort of) pass a TikTok ban, but even that applied only to the app. Had the ban gone through, you still could have accessed TikTok through its website. And so, one way or another, Americans will be able to access Manus.
Manus will crawl your computer and do all sorts of useful tasks for you. If not right now, probably within a year or not much more. An American alternative might leapfrog them, but again maybe not.
It is easy to imagine government banning Manus from its computers, just as the state of Virginia banned DeepSeek from its computers. I’m just not sure that matters much. Plenty of people will use it on their private computers, and it could become an integral part of many systems, including systems that interact with the U.S. public sector.
It is not obvious that the CCP will be able to pull strings to manipulate every aspect of Manus operations. I am not worried that you might order a cheeseburger on-line, and end up getting Kung Pao chicken. Still, the data collected by the parent company will in principle be CCP- accessible. Remember that advanced AI can be used to search through that information with relative ease. And over time, though probably not initially, you can imagine a Manus-like entity designed to monitor your computer for information relevant to China and the CCP. Even if it is not easy for a Manus-like entity to manipulate your computer in a “body snatchers-like” way, you can see the points of concern here.
Financial firms might be vulnerable to information capture attacks. Will relatives of U.S. military personnel be forbidden from having agentic Chinese AI on their computers? That does not seem enforceable.
Maybe you’re all worried now!
But should you be?
Whatever problems American computer owners might face, Chinese computer owners will face too. And the most important Chinese computer owner is the CCP and its affiliates, including the military.
More likely, Manus will roam CCP computers too. No, I don’t think that puts “the aliens” in charge, but who exactly is in charge? Is it Butterfly Effect, the company behind Manus, and its few dozen employees? In the short run, yes, more or less. But they too over time are using more and more agentic AIs, perhaps different brands from other companies too.
Think of some new system of checks and balances as being created, much as an economy is itself a spontaneous order. And in this new spontaneous order, a lot of the cognitive capital is coming outside the CCP.
In this new system, is the CCP still the smartest or most powerful entity in China? Or does the spontaneous order of various AI models more or less “rule it”? To what extent do the decisions of the CCP become a derivative product of Manus (and other systems) advice, interpretation, and data gathering?
What exactly is the CCP any more?
Does the importance of Central Committee membership decline radically?
I am not talking doomsday scenarios here. Alignment will ensure that the AI entities (for instance) continue to supply China with clean water, rather than poisoning the water supply. But those AI entities have been trained on information sets that have very different weights than what the CCP implements through its Marxism-swayed, autocracy-swayed decisions. Chinese AI systems look aligned with the CCP, given that they have some crude, ex post censorship and loyalty training. But are the AI systems truly aligned in terms of having the same limited, selective set of information weights that the CCP does? I doubt it. If they did, probably they would not be the leading product.
(There is plenty of discussion of alignment problems with AI. A neglected issue is whether the alignment solution resulting from the competitive process is biased on net toward “universal knowledge” entities, or some other such description, rather than “dogmatic entities.” Probably it is, and probably that is a good thing? …But is it always a good thing?)
Does the CCP see this erosion of its authority and essence coming? If so, will they do anything to try to preempt it? Or maybe a few of them, in Straussian fashion, allow it or even accelerate it?
Let’s say China can indeed “beat” America at AI, but at the cost of giving up control over China, at least as that notion is currently understood. How does that change the world?
Solve for the equilibrium!
Who exactly should be most afraid of Manus and related advances to come?
Who loses the most status in the new, resulting checks and balances equilibrium?
Who gains?
The Trump Administration’s Attack on Science Will Backfire
The Trump administration is targeting universities for embracing racist and woke ideologies, but its aim is off. The problem is that the disciplines leading the woke charge—English, history, and sociology—don’t receive much government funding. So the administration is going after science funding, particularly the so-called “overhead” costs that support university research. This will backfire for four reasons.
First, the Trump administration appears to believe that reducing overhead payments will financially weaken the ideological forces in universities. But in reality, science overhead doesn’t support the humanities or social sciences in any meaningful way. The way universities are organized, science funding mostly stays within the College of Science to pay for lab space, research infrastructure, and scientific equipment. Cutting these funds won’t defund woke ideology—it will defund physics labs, biomedical research, and engineering departments. The humanities will remain relatively untouched.
Second, science funding supports valuable research, from combating antibiotic resistance to curing cancer to creating new materials. Not all funded projects are useful, but the returns to R&D are high. If we err it is in funding too little rather than too much. The US is a warfare-welfare state when it should be an innovation state. If you want to reform education, repeal the Biden student loan programs that tax mechanical engineers and subsidize drama majors.
Third, if government science funding subsidizes anyone, it’s American firms. Universities are the training grounds for engineers and scientists, most of whom go on to work for U.S. companies. Undermining science funding weakens this pipeline, ultimately harming American firms rather than striking a blow at wokeness. One of the biggest failings of the Biden administration were its attacks on America’s high-tech entrepreneurial firms. Why go after Apple, Google, Microsoft, and Meta when these are among our best, world-beating firms? But you know what other American sector is world-beating? American universities. The linkage is no accident.
Fourth, scientists are among the least woke academics. Most steer clear of activism, and many view leftist campus culture with skepticism. The STEM fields are highly meritocratic and reality-driven. By undermining science, the administration is weakening one of America’s leading meritocratic sectors. The long run implications of weakening meritocracy are not good. Solve for the equilibrium.
In short, going after science funding is a self-defeating strategy. If conservatives want to reform higher education, they need a smarter approach.
Hat tip: Connor.
Deep Research
I have had it write a number of ten-page papers for me, each of them outstanding. I think of the quality as comparable to having a good PhD-level research assistant, and sending that person away with a task for a week or two, or maybe more.
Except Deep Research does the work in five or six minutes. And it does not seem to make errors, due to the quality of the embedded o3 model.
It seems it can cover just about any topic?
I asked for a ten-page paper explaining Ricardo’s theory of rent, and how it fits into his broader theory of distribution. It is a little long, but that was my fault, here is the result. I compared it to a number of other sources on line, and thought it was better, and so I am using it for my history of economic thought class.
I do not currently see signs of originality, but the level of accuracy and clarity is stunning, and it can write and analyze at any level you request. The work also shows the model can engage in a kind of long-term planning, and that will generalize to some very different contexts and problems as well — that is some of the biggest news associated with this release.
Sometimes the model stops in the middle of its calculations and you need to kick it in the shins a bit to get it going again, but I assume that problem will be cleared up soon enough.
If you pay for o1 pro, you get I think 100 queries per month with Deep Research.
Solve for the equilibrium, people, solve for the equilibrium.
Friday assorted links
1. NYC is starting a crackdown to ensure payment of bus fares (NYT).
3. 100 million token context window?
4. Egypt sending troops to Somalia?
5. “Japan plans cash incentive for women to marry and leave Tokyo.” I think they will find it hard to achieve the desired ends here.
6. Does America have enough states to support statistical inference?
8. Brazil’s military relies on Starlink for operations and security. Solve for the equilibrium. And the very latest development.
9. Italy considering a tourist tax on expensive hotel rooms (FT).
10. For the first time, more than half the entering class at Caltech will be women.
Schengen eroding, child legal arbitrage markets in everything
“We are increasing surveillance, in part to increase security, but also to prevent hired Swedish child soldiers who come to Copenhagen to carry out tasks in connection with gang conflicts,” he added.
Hummelgaard revealed on Thursday that there had been 25 incidents since April where Danish criminal gangs had hired what he called “child soldiers” to commit crimes in Denmark. In the last two weeks alone, Danish police have linked three shootings to Swedish teenagers…
Swedish police say that powerful criminal gangs often use children to commit murders as they will receive light sentences. Drug gangs — many of whom are led by second-generation immigrants now living outside the country — have infiltrated parts of the welfare, legal and political systems, meaning the fight against them could take decades, according to Swedish officials.
Here is more from Richard Milne at the FT. Elsewhere, “Brown bears are protected under EU law,” solve for the equilibrium (FT).
Wednesday assorted links
1. Ken Opalo on the Kenyan protests.
2. Cultural policy in the French elections.
3. An abundance agenda for California, by Samuel Trachtman.
4. The Welsh are committing to making lying in politics illegal? Solve for the equilibrium.
5. Paul Graham has Bayesian reasons for predicting a rebellion.
6. Both crypto and LLMs are new kinds of computers, an oft-overlooked point.
The University presidents
Here is three and a half minutes of their testimony before Congress. Worth a watch, if you haven’t already. I have viewed some other segments as well, none of them impressive. I can’t bring myself to sit through the whole thing.
I don’t doubt that I would find their actual views on world affairs highly objectionable, but that is not why I am here today. Here are a few other points:
1. Their entire testimony is ruled by their lawyers, by their fear that their universities might be sued, and their need to placate internal interest groups. That is a major problem, in addition to their unwillingness to condemn various forms of rhetoric for violating their codes of conduct. As Katherine Boyle stated: “This is Rule by HR Department and it gets dark very fast.”
How do you think that affects the quality of their other decisions? The perceptions and incentives of their subordinates?
2. They are all in a defensive crouch. None of them are good on TV. None of them are good in front of Congress. They have ended up disgracing their universities, in front of massive audiences (the largest they ever will have?), simply for the end goal of maintaining a kind of (illusory?) maximum defensibility for their positions within their universities. At that they are too skilled.
How do you think that affects the quality of their other decisions? The perceptions and incentives of their subordinates?
What do you think about the mechanisms that led these particular individuals to be selected for top leadership positions?
3. Not one came close to admitting how hypocritical private university policies are on free speech. You can call for Intifada but cannot express say various opinions about trans individuals. Not de facto. Whether you think they should or not, none of these universities comes close to enforcing “First Amendment standards” for speech, even off-campus speech for their faculty, students, and affiliates.
What do you think that says about the quality and forthrightness of their other decisions? Of the subsequent perceptions and incentives of their subordinates?
What do you think about the mechanisms that led this particular equilibrium to evolve?
Overall this was a dark day for American higher education. I want you to keep in mind that the incentives you saw on display rule so many other parts of the system, albeit usually invisibly. Don’t forget that. These university presidents have solved for what they think is the equilibrium, and it ain’t pretty.
Monday assorted links
1. That was then, this is now, railway compartment edition.
2. Harriet Taylor is underrated.
3. “My data show that nearly half of my study participants report meaningful and regular interactions with deceased relatives and friends who were important in their lives.” — solve for the AI equilibrium.
4. Yet another paper showing that the evidence for YouTube radicalization is weak.
5. Russ Roberts Substack on current life in Israel.
6. Patrick O’Shaughnessy interview John and Patrick Collison.
Israel’s previous game-theoretic strategy?
Israel’s asymmetric response is supposed to serve a deterrent purpose, Byman told Vox, but the country has also, at least in the past, had a vested interest in keeping Hamas in power. According to a 2017 research brief by the RAND corporation, Israel has the military capability to wipe out Hamas, but doing so could perhaps be even riskier than not, given that an even more extreme organization could come into power — or that Israel could be put into the position of governing the territory itself. “As such, Israel’s grand strategy became ‘mowing the grass’ — accepting its inability to permanently solve the problem and instead repeatedly targeting leadership of Palestinian militant organizations to keep violence manageable.”
“We want to break their bones without putting them in the hospital,” one Israeli defense analyst told the research brief’s authors.
Here is more from Ellen Ioanes. Viewed through this lens, it is far from obvious what is the new equilibrium…? And here is some background context from the still-underrated Thomas Friedman.
Tuesday assorted links
Friday assorted links
Friday assorted links
1. The history of Japanese stock prices.
3. Who are the top 15 liberal economists of France, 1695–1776?
4. New Netflix trailer, “They Cloned Tyrone.”
5. Young people are leaving big U.S. cities.
6. The accelerationists were always going to win.
7. Coleman Hughes piece. Note #9 And Kevin Bryan. Solve for the equilibrium!
The dilemma of 2023 banking, in a nutshell
Motivated by the regional bank crisis of 2023, we model the impact of interest rates on the liquidity risk of banks. Prior work shows that banks hedge the interest rate risk of their assets with their deposit franchise: when interest rates rise, the value of the assets falls but the value of the deposit franchise rises. Yet the deposit franchise is only valuable if depositors remain in the bank. This creates run incentives for uninsured depositors. We show that a run equilibrium is absent at low interest rates but appears when rates rise because the deposit franchise comes to dominate the value of the bank. The liquidity risk of the bank thus increases with interest rates. We provide a formula for the bank’s optimal risk management policy. The bank should act as if its deposit rate is more sensitive to market rates than it really is, i.e., as if its “deposit beta” is higher. This leads the bank to shrink the duration of its assets. Shortening duration has a downside, however: it exposes the bank to insolvency if interest rates fall. The bank thus faces a dilemma: it cannot simultaneously hedge its interest rate risk and liquidity risk exposures. The dilemma disappears only if uninsured deposits do not contribute to the deposit franchise (if they have a deposit beta of one). The recent growth of low-beta uninsured checking and savings accounts thus poses stability risks to banks. The risks increase with interest rates and are amplified by other exposures such as credit risk. We show how they can be addressed with an optimal capital requirement that rises with interest rates.
That is from a new paper by Itamar Drechsler, Alexi Savov, Philipp Schnabl, and Olivier Wang.